The inequality illusion
Scratch the surface to find that income disparity isn’t all it’s hyped up to be
Benjamin Disraeli is once said to have remarked that there are three kinds of lies: lies, damned lies, and statistics. As a man who views the world through empiricist lenses, I’ve never been fond of the saying (I prefer to think of the three categories as lies, damned lies, and personal anecdotes), but there is some truth to the maxim. Statistics, arranged with malice aforethought, can lead their viewers to make facile, incorrect inferences.
Such is the state of our national discussion on household income inequality. We’re told that we’re witnessing a steady deterioration in the fairness of how we divide of our economic pie. As proof, we are offered the following: In 1967 (the year that the Census Bureau began collecting such information), the lowest quintile of households had 4 percent of the nation’s income, and their fellow quintiles had 10.8 percent, 17.3 percent, 24.2 percent, and 43.6 percent, while the very top five percent had 17.2 percent. By 2009, the numbers had changed; the bottom quintile earned 3.4 percent, the other quintiles earned 8.6 percent, 14.6 percent, 23.2 percent, and 50.3 percent, with the top five percent taking home 21.7 percent of the national income.
Many see this as a critical problem, and recommend a variety of radical solutions to combat it. We’re told that we need to strengthen unions, set command and control wage floors and ceilings that mandate minimum and maximum wages, wipe out the savings of the wealthy through capital gains taxes or other measures, and so on, to prevent what must be theft from the poor by the rich.
There are a large number of problems with this policy prescription, the foremost of which is that America does not have an inequality problem.
Let’s begin with the obvious: the inequality of well-being has drastically fallen since 1967. Bill Gates may have a million times the income of the average man, but he cannot eat a million meals. Despite the enlarged access to medical care that his income enables, his life expectancy is not much higher than his fellow American — indeed, demographically, it is poor whites who are at the top of the life expectancy charts (second only to Asians). Technology and economic growth have brought most significant technologies within buying reach of the masses; the real mean income of the bottom quintile may have only increased by 28.6 percent to the top quintile’s 70.7 over the past 42 years, but the utility that the bottom quintile got from each marginal dollar was much higher. And at issue is not just the fact that rising income has pushed us all further along the curve of diminishing marginal returns, but the inequality of consumption is also much less than the inequality of income — with increasing wealth comes an increasing tendency to give away (either to offspring, charity, or the government) a higher fraction of earned income.
Not only that, but the rich have also faced much higher inflation relative to the poor. Between Wal-Mart and globalization of production, low-end consumer goods have become cheaper at a much faster rate than high-end consumer goods. Adjusted for purchasing power, the growth disparity in consumption between the classes becomes miniscule.
Moreover, much of the growth in inequality can be explained by demographic factors. Income inequality is usually highest among the older and more highly educated, for the simple reason that by increasing the earning potential of an individual (either by giving them a longer period in which to earn or better tools to earn with), the variation in outcomes increases as well. By some economic analyses, a large majority of the observed income inequality is explained by simple demographic effects, the product of an aging (and slightly more educated) population.
On top of this, the rise in income inequality has been largely matched by a rise in the inequality of hours worked. Higher income individuals are simply working more than their lower-earning peers. Part of this may be demographic as well: With the rise of the single-occupant household, there has been a rise in the so-called “threshold earners,” individuals who work as much as they need to satisfy their consumption needs, and then stop.
Finally, it is unclear whether there are any undesirable structural causes for the rise in income of those households that are responsible for most of the increase in income inequality, the top 1 percent of earners. We live in a more global, more connected economy. The creation of new intellectual property, whether it is a book, or a movie, or a piece of software, is more valuable than it was in earlier times because the number of people who can enjoy it has increased. Rashard Lewis, a 31-year old small forward for the Washington Wizards, has a salary of $19 million per year, more than three times (adjusted for inflation) than what basketball great Michael Jordan made at the same age. Is Rashard Lewis a better player, or has the productivity of basketball as an entertainment industry increased due to network effects? Are financial executives earning their extra monies by devoting a greater portion of their day to rent seeking, or are their rising incomes the result of making decisions that price the activity of a larger absolute market? Is J.K. Rowling a better of an author than Charles Dickens, or is she merely the recipient of a windfall that the information economy has provided? And should we cap the amount of money that the Mrs. Rowlings of the world earn through their creations even when, by any calculation, the value of those creations are higher today than they were in the past?
Inequality alarmists propose smashing the incentives structure that allows the free market to operate, through monopolization of the labor supply, or taxes that grossly violate the benefits-received principle, or command and control schemes on individual income. They are using statistics whose real story — a tale of demographic and technological trends — is hidden at first glance, and using the obvious (but wrong) inference from those statistics to justify a policy of income redistribution and market meddling. They are motivated not out of concern with the statistics themselves, but by their ideological preferences and partisan allegiances.
Don’t buy the inequality hype; the American system remains a fair one, and is deserving of continuation.